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Industrial output struggled in the third quarter

The recovery in Polish industry has stalled, with industrial production in September declining by 0.3%YoY, compared to our forecast of a 0.8%YoY decline and consensus of +0.3%YoY. The previous month also saw a decline of 1.2%YoY. Seasonally adjusted output slightly declined too in the third quarter (around -1.0%QoQ). Domestic consumption alone, even if very robust (we estimate around 4.0%YoY in the third quarter) isn't enough for this sector of the economy to expand.

Unimpressive industrial ouput performance in 3Q24

MoM 3m-month moving average (SA)

Source: GUS, ING.

We believe the production weakness is temporary. The investment impulse, associated with EU funds, is gradually gaining momentum. This year, beneficiaries will receive approximately PLN20bn from the Recovery and Resilience Fund (RRF), and around PLN60bn plus structural funds in 2025. This should also stimulate private investments, which have been subdued in recent years. Additionally, the German automotive industry showed some signs of recovery in August and continued improving in September.

The German economy faces significant structural problems, so we do not expect substantial support from this direction. To avoid industrial stagnation, as experienced by Germany and the Czech Republic, domestic growth factors are crucial. Poland has the opportunity to avoid the stagnation seen in neighbouring countries, as it possesses growth factors that can stimulate domestic demand. Besides strong consumption, we anticipate a revival of public investments and a boost to private investments through multiplier effects. Poland is just beginning to spend EU funds and has its peak ahead, while other countries are somewhat more advanced in the process. Overall, the third quarter was poor for the domestic industry, but we count on improvement ahead.

Construction continues to contract

Construction output fell by 9.0%YoY in September, slightly less than expected (consensus of -9.6%), following a 9.6%YoY decline in August.

Significant drops were observed across all construction categories:

Building construction (flats and houses) fell by 10.1% year-on-year (August: -7.9%).

Civil engineering works (basic infrastructure) by 8.9% (August: -10.6%), and

Specialised construction activities by 7.9% (August: -9.8%).

The construction sector is experiencing a recession due to the slow uptake of EU cohesion funds at the beginning of the new financial period and the delayed disbursement of funds from the Recovery and Resilience Facility (RRF), which is negatively impacting civil engineering projects. We expect the situation to improve from next year only as beneficiaries will receive roughly twice as much from cohesion funds as this year along with significantly higher RRF abortion.

Residential building construction is also shrinking. The previous government's housing programme (mortgage subsidies) expired at the end of 2023, and a new one has not yet been agreed upon within the government coalition. The demand for housing is also being hampered by the highest mortgage interest rates in Europe.

Labour market metrics also point to slower growth last quarter

The average wage and salary in the enterprise sector amounted to PLN8141 in September, rising by 10.3%YoY (consensus: 11.1%). At the same time, average employment decreased by 0.5%YoY (in line with expectations) to 6.462 million people. According to the StatOffice, the decline in nominal wages vs. August was due to a reduction in the scale of additional payments that occurred in the previous month. Compared to August, the number of jobs in enterprises declined by 8,000.

Real wages growth slowed amid weaker nominal wages and higher inflation

Real wages, %YoY

The growth in wages is no longer as robust as at the beginning of the year when it hovered around 12-13%YoY, but it remains in double digits. Since mid-2024 inflation has rebounded significantly, reaching 4.5%YoY in the third quarter compared to 2.5%YoY in the second quarter. This has resulted in a marked slowdown in real wage growth (from 8.5%YoY to 6.0%YoY). Higher electricity and gas bills may limit resources available for other household expenditures.

In our view, the slower growth in real wages has somewhat dampened the dynamics of consumption growth, which remains the main driver of the current economic recovery. The negative trend in employment also persists. Since January, the number of jobs in the enterprise sector has been reduced by 54,000.

Employment is shrinking slightly since the beginning of 2024

Change in enterprise sector employment, MoM, thous. of persons

Still on track to achieve 3% GDP growth in 2024

The labour market remains in good condition but shows that the Polish economy hit a soft patch in the third quarter, after stronger-than-expected growth between April and June.

Data from the real economy confirms this view. Industrial production was stagnant and activity in construction contracted. We expect that the third quarter was also somewhat less favourable for retail trade, especially in goods, however demand for services most likely remained buoyant.

We forecast that household consumption growth eased towards 4%YoY in 3Q24 from 4.7%YoY posted in 2Q24. We estimate third quarter GDP growth of 2.8%YoY (3.2%YoY in 2Q24) and 3% for the whole of 2024.

The USD/CAD pair oscillates in a narrow band around the 1.3830 region during the Asian session on Tuesday and remains well within the striking distance of its highest level since August 6 touched the previous day. Meanwhile, the fundamental backdrop seems tilted in favor of bullish traders and suggests that the path of least resistance for spot prices remains to the upside. 

Crude Oil prices struggle to capitalize on the previous day's modest gains amid concerns over slowing demand and a prolonged economic downturn in China – the world's top importer. Apart from this, bets for a larger, 50 bps rate cut by the Bank of Canada, bolstered by softer domestic consumer inflation figures, might continue to undermine the commodity-linked Loonie. This, along with the underlying strong bullish sentiment surrounding the US Dollar (USD), validates the near-term positive outlook for the USD/CAD pair. 

The incoming upbeat US macro data suggested that the economy remains on a strong footing, which should allow the Federal Reserve (Fed) to be patient in cutting interest rates. Moreover, the recent comments by a slew of influential FOMC members reaffirmed market expectations for a less aggressive policy easing by the US central bank. This, in turn, pushes the US Treasury bond yields and the USD Index (DXY), which tracks the Greenback against a basket of currencies, to their highest level in almost three months.

Furthermore, a turnaround in the global risk sentiment – as depicted by a softer tone around the equity markets – should continue to benefit the safe-haven buck and support prospects for a further appreciating move for the USD/CAD pair. Traders now look forward to the release of the Richmond Manufacturing Index from the US, which, along with a speech by Philadelphia Fed President Patrick Harker, will drive the USD demand. Apart from this, Oil price dynamics should provide some impetus to the USD/CAD pair.

Source: FXSTREET

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Macro:

US stocks are unlikely to sustain their above-average performance of the past decade as investors turn to other assets including bonds for better returns, Goldman Sachs Group strategists said.

The S&P 500 Index is expected to post an annualised nominal total return of just 3 per cent over the next 10 years, according to an analysis by strategists including David Kostin. That compares with 13 per cent in the last decade, and a long-term average of 11 per cent.

They also see a roughly 72 per cent chance that the benchmark index will trail US Treasury bonds, and a 33 per cent likelihood they’ll lag inflation through 2034.

“Investors should be prepared for equity returns during the next decade that are toward the lower end of their typical performance distribution,” the team wrote in a note dated Oct 18.

US equities have rallied following the global financial crisis, first driven by near-zero interest rates and later by bets on resilient economic growth. The S&P 500 is on track to outperform the rest of the world in eight of the last 10 years, according to data compiled by Bloomberg.

Still, this year’s 23 per cent bounce has been concentrated in a handful of the biggest technology stocks. The Goldman strategists said they expect returns to broaden out and the equal-weighted S&P 500 to outperform the market cap-weighted benchmark in the next decade.

Even if the rally were to remain concentrated, the S&P 500 would post below-average returns of about 7 per cent, they said.

The latest Bloomberg Markets Live Pulse survey showed investors expect the US equity rally to extend into the final stretch of 2024. The strength of Corporate America’s results are seen as more crucial for the stock market’s performance than who wins the US presidential election or even the Federal Reserve’s policy path. 

Source: Straitstimes